What Is the Future of Airline Connectivity Post-Connexion?

Spring is the time of year associated with renewal, but this year it is the holiday season that will herald regeneration for inflight connectivity. By year end, a host of new services for airline passengers are scheduled to be springing to life. Counterbalancing the arrivals will be the departure of the 800-lb. gorilla of connectivity: Connexion by Boeing.

The untimely but not unexpected announcement in mid-August that Boeing's broadband offering will be scrapped late this year has given pause to the emerging connectivity suitors. "We're a little concerned right now," says Panasonic Avionics Corp. spokesperson David Bruner. "The departure of Connexion signals satellite providers and airlines that there might be issues with the sector."

Analysts differ about the size of the inflight broadband and telephony markets. UK-based Inflight Management Development Center, a consulting firm specializing in the IFE and communications industry, is predicting that carriers will spend $12.9 billion over the next five years for IFE, content and connectivity.

Telecom, Media and Finance Associates has a more bearish outlook: "Projections that inflight communications can become a multibillion-dollar market over the next few years are completely unrealistic," argues Tim Farrar, president of the Menlo Park, Calif.-based company.

Connexion, launched in 2001, had been installed on 156 aircraft belonging to 12 airline customers. The ballpark figure for installationhas been put at around $400,000 per aircraft (ATW, 3/03, p. 46). It offered bandwidth "equivalent to having DSL at the seat" for a flat fee of $26.95 or $9.95 per hr., giving passengers with laptop computers or handheld devices access to the Internet, e-mail and other broadband services such as voice-over-IP via wireless or Ethernet connections during their flights. The company also had 20 government and private aircraft customers for the satellite-based Ku-band service. "The plan is to have the service phased out by the end of the year," says aBoeing spokesperson, adding that there is "no possibility" of an intervention by an investor.

"It was a very difficult business model [Boeing] undertook," says Wale Adepoju, chief analyst and CEO of IMDC. "Though [Connexion's] social and economic contributions are immense, the financial contribution is awful." He adds, "Like most new technologies, it's the second mouse that gets the cheese."

The second mouse in this case is Panasonic, which plans to launch a broadband service by year end. Bruner says the company's offering, announced in April, is "similar to Connexion." It has the benefit of hindsight and more advanced technologies, however. "As a trailblazer,every step was expensive [for Connexion]," he says. "We're improvingevery possible area."

Yet Boeing is not alone in pulling the plug on inflight connectivity. Also shuttering its operations by the end of 2006 is Verizon's Airfone business, which will affect the North American seatback phone service on 1,000 aircraft operated by six US Major airlines. Meanwhile, Cathay Pacific Airways in June terminated its Netvigator Inflight e-mail, a service provided in conjunction with Tenzing Communications,now a part of OnAir, the Airbus-SITA joint venture.

Contenders for Verizon's business could include Aircell and LiveTV, a subsidiary of JetBlue that pioneered live television on commercial transports, both of whom won licenses from the US Federal Communications Commission for the air-to-ground spectrum Verizon is using. Aircell currently provides phone and Internet service to corporate aircraft through a ground network and the Iridium satellite constellation and plans to begin offering both for commercial airlines next year using the newly acquired licenses. It has conducted demonstration flights of the technology but has yet to announce an airline customer. LiveTV furnishes satellite TV and/or radio to a number of carriers. However, US FAA has yet to approve any onboard telephone systems for commercial transports.

New Entrants Though the sector is arguably unsteady in the wake ofthe failures, OnAir and AeroMobile, a joint venture between ARINC and Telenor, are gearing up to launch mobile phone and PDA connectivityservices in the same timeframe. In late August, Ryanair said it would install the OnAir system across its entire fleet beginning in mid-2007, subject to regulatory approval. Meanwhile, trials in which threeother carriers are participating are set to begin early next year. Separately, Qantas intends to evaluate AeroMobile's solution on a 767 in 2007.

Panasonic says differences in its technologies and applications should help it succeed where Connexion did not, even though both are based principally on using Ku-band satellites for relaying information.

While Connexion's Ku-band links can supply more bandwidth than L-band satellites like Inmarsat--on which AeroMobile and OnAir services will be based--the higher data rate comes at the price of a larger, heavier antenna and higher costs for installation. In addition, there is extra fuel burn from the drag of the external antenna, which Farrar says is "equivalent to as many as five additional passengers." Airlines also pay a penalty in payload; the system weighs more than 600 lb., according to media reports. Boeing has been mum on the particulars of weight and drag.

The high cost of Ku-band service was considered by many to be the Achilles' heel of Connexion. Bob Thompson, senior director-satellite services at ARINC, explains how the process works: "You go to a satellite owner, like PanAmSat or Intelsat, and look for satellites available in areas you wish to cover." The next step is negotiating a transponder lease, which he says is typically multiyear and nominally costs $1.8 million per year. "You own the whole pipe for a year. You're not buying minutes, like with Inmarsat."

ARINC operates the equivalent of Connexion in the corporate jet world. Called SKYLink, the Ku-band system was installed in 28 aircraft as of late August and had been operational for 15 months. ARINC has orders for 22 more systems. Thompson says it leases a single transponder for the continental US, which covers one-third of Mexico and some parts of Canada. It also leases a transponder to cover "about 20 countries" in Europe. "If [Connexion] was providing near-global coverage,it had to have a large number of transponders," he notes. Farrar estimates Boeing was paying $50 million a year for transponders, which by Thompson's per-lease cost means it was leasing roughly 28 units.

ARINC is taking a more metered approach with the business aviationcommunity. "We follow the customers," Thompson says. "When we have enough customers to justify setting up a new region, we'll do so." Thecompany in 2004 announced it would offer a SKYLink-type service to startup carriers; it since has abandoned those plans in lieu of a morefocused approach.

Volume Panasonic is well aware of the pitfalls. "The premise for Boeing was very high demand," Bruner says. "We're trying to ensure we have enough customer base to launch." Though it has "a large enough group in terms of people who have said they're interested" in the service, "formal commitments" from airlines are needed. "Everyone who hasgone before us has pretty much failed," he notes, "so we're taking cautious steps forward.... We don't want to do anything that would harm our IFE reputation."

The firm is speaking with 20 carriers, he says, among them all thecurrent Connexion customers including Lufthansa, the airline with the largest CBB-equipped fleet, numbering 62 aircraft. He says Panasonic is "looking for ways to take advantage of some of the CBB equipmentand possibly upgrade it."

A spokesperson for Lufthansa says LH is beginning the process of "searching for a partner to take this on." She says feedback from those who used Connexion was good; "We knew it was working well for us, but it wasn't a solid-based model for Boeing."

When Connexion originally launched in 2001, it had commitments from three US carriers to equip 1,500 aircraft, well above the 700 Farrar predicted it would need to become profitable. After the 9/11 attacks, however, the deals crumbled. On the 156 aircraft that ultimately were outfitted, usage was low. "Penetration was in the low single digits for any one flight--and that was after a couple of years of havingit out there," says the Connexion spokesperson.

Farrar estimates that Connexion's costs were in the neighborhood of $150 million a year, with revenues limited to about $150,000 per aircraft per year assuming 10 users per flight, or about 5% of the 200 or so passengers on a typical long-haul flight. Assuming those numbers are realistic, Connexion would have been losing well over $100 million a year.

Though it is heavily dependent on Ku-band satellites, Panasonic says its system is designed using the most current "broadband spread-spectrum technologies for modems," meaning it can get more bandwidth from a single transponder than Connexion could. Bruner says the new technology allows the company to buy capacity from satellite providers in "smaller steps" rather than "large chunks." The system also is set up to "blend" Ku-band and L-band services where each makes sense. Theantennas and equipment are lighter, making for less drag and better payload, he says.

Cost structuring is different as well. Bruner points out that CBB was the service provider and paid the "majority of the cost of the equipment" onboard. "In our case, we provide the equipment to the airline and the airline provides the service to the customer. All decisions are under the airline's control." Capital acquisition and operatingcosts are significantly less than CBB's, he adds.

Missing Links In terms of the passenger experience, Bruner says Panasonic is filling in the "missing pieces" in CBB's business plan. They include expanding the broadband experience to encompass "interesting capabilities" with its IFE equipment, a feature he says brought the company into the broadband arena in the first place. Those capabilities might include a "Web cafe" type of environment using IFE, says Adepoju, where "everyone can surf " and entertainment features "come alive." Panasonic's and others' IFEs already allow passengers to use webchat and webmail.

Mobile phones and handhelds also fell through a hole in Boeing's service offerings--deliberately. Two years ago, Connexion officials told ATW that voice connectivity was "a nice incremental offering" but that the company didn't see "a large volume of use of voice in the cabin long-term."

In hindsight, that position appears too limiting. "Those things expand enough the usage of the system to make a difference," says Bruner. Adepoju says that while some 80% of passengers have either cellphones or Blackberries in hand, those traveling with laptops are far fewer. "Leisure travelers were not catered to [with Connexion]. Even business travelers--only 50% have a laptop with them when traveling." Panasonic already allows passengers to send instant messages through its IFEs, and as of last September agreed to incorporate AeroMobile's inflight mobile communications technologies.

However, Boeing's original concern with cellphones--the social andprivacy aspects--remains a substantial unknown. "It's very, very difficult to implement due to social issues. If the social factors are not managed correctly, it will be a mess," says Adepoju.

A related issue is security. Recently, the discovery of an unidentified mobile phone in the cabin was enough to cause a British Airwaystransatlantic flight to do a 180 and return to London Heathrow out of concern it might presage a bomb onboard. Only a week later, a Northwest Airlines DC-10 similarly returned to Amsterdam after several passengers were observed passing mobile phones back and forth. The passengers were detained and questioned and all subsequently were released.

Ironically, Farrar, who believes demand for inflight phone use hasbeen overestimated significantly, also reasons that the social and security issues are being overblown. He tells this magazine that mobile use will be modest enough that these will not become significant factors in restricting usage in the cabin.

AeiroMobile and OnAir also are convinced the hurdles can be overcome. Rainer Koll, VP of Thales' commercial aerospace business unit, says airlines are considering creating "quiet zones" in cabins or "quiet times" when only text messaging will be allowed. Thales is providing the components of the OnAir system, including the picocell that automatically adjusts the power to GSM and GPRS devices onboard, minimizing potential interference with aircraft systems and giving the crew control over when and how the system operates. Koll says the product will be turnkey and will cost about $100,000 including installation.

Talk Is Cheap Air France, BMI and TAP all intend to test the OnAirsystem next year but Ryanair has jumped the queue by ordering it forits entire fleet, even ahead of the proving flights, assuming telecommunication regulators from the various countries okay the plan. Under the OnAir system, mobile phone operators will charge passengers at rates "in line with current international roaming charges" on passengers' normal monthly bills. Ryanair will receive a commission from OnAir on call revenues generated by passengers.

The system will start out using Inmarsat Swift 64 service, the legacy L-band network, and later will employ the new Inmarsat broadband service slated to go live in mid-2007. In 2008, OnAir plans to introduce data services through which passengers will be able to access theInternet with laptops or use webmail or webchat through IFEs. Koll says the data rate, up to 900 kbps to and from the aircraft, will be high enough for VoIP.

Rival AeroMobile, which is targeting long-haul routes, says priceswill be "aligned with current international GSM roaming rates." Peter Tuggey, director-sales and airline programs, says AeroMobile is a technology agnostic when it comes to the satellite connection, though the system will start initially using Swift 64. In terms of cabin politics, he says the system architecture will give the cabin crew the ability to "manage social aspects and limit disruptions to an absoluteminimum."

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